# **Box 2: OECS Subsidy Agreement to Air Operators (cont...)**

Bilateral subsidy agreement between small island states and their American counterparts take the form of MRGs, since these are permitted in the U.S. MRGs have proven to be highly controversial. During the economic crisis, MRGs led to losses in the millions of dollars for several countries. Three of the four countries with longer runways –St. Kitts & Nevis, St. Lucia, and Grenada— have had to make such payments.

Given this experience, MSAs and MRGs are often described as a burden or rather as a “necessary evil.” In most of the small islands, the opinions have been strongly negative about having to set up financial agreements with airlines. Some countries have expressed, informally, either overall ideological disagreement with creating what could be seen as a subsidy to outside airlines, or have lamented that they feel forced to participate in what they consider an unfair and unbalanced process where the bargaining power seems to be clearly in the airlines’ favor.

Interesting enough, in recent years, the agreements have not been paid. In St. Kitts, for example, the agreements have not cost the government anything in the last two years, since the overall yearly passenger flow has met targets. St. Kitts sees the agreements as guaranteeing continued connectivity and service throughout the year: Load factors will be low off-season, but service will continue, and load factors will be much higher in-season, compensating for the low season. In the case of Grenada, load factors are now monitored actively in “real time”, and requests for flight schedule adjustments are made to, for example, American Airlines, to make sure that load factors remain reasonable.

In 2012, the net fiscal effect of the agreements amounts to between 0.12 and 0.2 percent of GDP, close to 0.6-1% of tax revenues, and 0.1-0.3 percent of public debt (Table 6). Individual ministries see these agreements as expensive items on their budgets. Also, an overall question can be raised as to who is really paying for them, since funding for most of these agreements comes from overall tax revenues.

**Table 6: Impact of subsidies to overall tax revenue, GDP, and public debt (2011)**

|**Subsidy Burden (percent)**|**Grenada**|**St Kitts and Nevis**|**Saint Lucia**|
|---|---|---|---|
|Share on Tax Revenue|0.67|0.66|0.82|
|Share on GDP|0.12|0.14|0.19|
|Share on Public Debt|0.14|0.09|0.26|

_Source: Authors’ calculation based on data provided by the ECCB (2013), World Bank (2013b) and IMF (2014)._ An additional aspect to the airline subsidies is the percentage of the overall ticket price the subsidy is supporting. For a trip planned starting February 4, 2013, with a return date of February 15, 2013 (two weeks stay), the average lowest cost fare over all the small islands states from the U.S. amounts to US$806, and the average from Europe US$1,400. If one assumes the supposed maximum subsidy of US$50 per passenger, this would amount to 6.2% of the US fare, and 3.6% of the European fares. The question arises if the traveler could not absorb this directly, keeping the costs within the sector rather than using tax revenues.

_Source: Briceno-Garmendia, C., Bofinger, H., Millan, M.F. and Cubas, D. (2013)._ 27