Sunday, November 28, 2010

The history of the Baha Mar project

The history of the 1,000 acre Baha Mar project

AFTER years of manoeuvering over the 1,000-acre Baha Mar project on Cable Beach, the Ingraham government (in its own words) has finally made sweet lemonade from the sour fruit left on the table by the Christie administration.

In April 2005 the newly formed Baha Mar Development Company (owned by a Lyford Cay-based property developer named Sarkis Izmirlian) bought three aging hotels on the Cable Beach strip with a $200 million loan from the Bank of Nova Scotia. The venerable Nassau Beach was subsequently closed, while the Crystal Palace and Cable Beach Hotels were renovated and re-branded.

That same year Baha Mar concluded an agreement with the Christie administration for a $1 billion-plus development, including several hotels, a casino, retail village, convention centre, expanded golf course, and beach and pool amenities. Ironically, had the project got underway when it was supposed to, it would have opened in the midst of the Great Recession - with potentially devastating consequences.

Side agreements to the 2005 agreement included deferred taxes that could later be paid in instalments, a $20 million marketing contribution from the Ministry of Tourism, and a commitment to upgrade the airport and other infrastructure.

There was also an agreement to transfer to the developer hundreds of acres of both Crown and government land on Cable Beach worth an estimated $150 million.

However, Baha Mar proved unable to raise $400 million in capital, show evidence of further financing, produce detailed plans, or attract world class partners by the agreement's stated deadline of October 2006.

With an election approaching, the Christie government scrambled to revive the project. And by early 2007 it had been reorganised as a joint venture with Harrah's Entertainment. The planned capital spent more than doubled to $2.6 billion (along with more than a quarter billion dollars in government concessions) and promoters were hailing the project as unprecedented in scope and character.

The revised project included a larger casino, double the meeting room space, and 1200 more hotel rooms.

But despite "vigorous negotiations" a deal could not be finalised before May 2007. And when the electoral dust had settled, Perry Christie was replaced as prime minister by Hubert Ingraham, who immediately launched a review of the project.

Although the new government eventually decided it would abide by the 2005 terms, Baha Mar insisted on further negotiations, according to the prime minister. And by February 2008 he unveiled a supplemental Heads of Agreement that trimmed some of the concessions given three years earlier.

"There is high expectation by the Bahamian public about the Baha Mar project," Ingraham acknowledged in March, 2008 during passage of a parliamentary resolution to authorise the transfer of public lands to the developer. "We will do all we can to facilitate it, but I do not want to oversell it."

March 2009 was the new deadline set for the government's conditions to be met so that the deal could be finalised. But long before that could happen, Harrah's got cold feet due to the economic downturn and pulled out of the partnership, putting the whole project in jeopardy. Unable to obtain regular financing in the capital markets, Baha Mar turned to the cash-rich Chinese government to save the development.

Earlier this year, China's Export-Import Bank agreed to arrange $2.5 billion in financing, and Beijing's state-owned construction corporation signed on to build the project, which will feature six hotels and add 3,500 hotel rooms and condos to the country's current inventory of 15,000 - more than half of which in Nassau.

Following the prime minister's recent trip to China to firm up the details of the construction arrangements, the House of Assembly unanimously passed a government-sponsored resolution to approve the project, including the unprecedented issuance of up to 8,150 work permits for non-Bahamian construction workers.

After talks with the Chinese, Ingraham was able to announce that he had doubled the share of business for Bahamian subcontractors, with more than construction 4,000 jobs now on offer, and that some $8 million would be spent on training programmes for Bahamian workers.

"We put down some benchmarks, like the $400 million in Bahamian contracts, and said if they accepted our terms we would approve the project by the end of November," the prime minister told me.

"We always disclose the terms of deals - not like the PLP when they signed the 2005 Baha Mar Heads of Agreement with a confidentiality clause, and contemporaneously issued side letters containing larger exemptions from taxes and committing even more public money in violation of the (phase three) deal they had agreed with Kerzner two years earlier."

In fact, this last point has proven to be the only remaining fly in the Cable Beach lemonade.

The prime minister does not accept that the current Baha Mar deal violates the guarantees to Atlantis developer Sol Kerzner that no subsequent investor would get more favourable terms. Kerzner's complaint focused on the ratio of Bahamian to non-Bahamian construction workers, presumably because Baha Mar will benefit from a cheaper, more skilled, and more productive labour force.

"Among the many requirements that the government imposed (on us) was a strict rule that at least 70 per cent of the total construction labour force would be Bahamian. However, this new (Baha Mar) deal will constitute a complete reversal of (that) standard," Kerzner said angrily.

The prime minister's response is that "the government will review Kerzner's claim and seek to resolve all issues."

The question of whether the Bahamas can accommodate thousands of new hotel rooms opening at the same time is another issue for Atlantis.

"The reason is that the tourism infrastructure needs to catch up to additional demand.

"Airlift is not going to grow and develop in one day just because another 3,000 luxury rooms are opened. And I think that is very critical...and not easily done," Managing Director George Markantonis told The Tribune recently.

The Baha Mar project will get underway before the end of this year, with contracts awarded to Bahamian firms. The China State Construction & Engineering Company should begin work by the spring, and the project could be substantially completed by 2014.

In response to market concerns, Baha Mar has agreed to stagger the opening of the new hotels over a five-month period stretching into 2015, and close the Crystal Palace Hotel during renovations.

According to the Chinese, the project relies on being developed, marketed and operated as a single phase "to induce demand that would not otherwise exist for a series of standalone hotels."

They point out that the Hyatt, Morgan's and Rosewood hotel companies are investing $62 million of their own money into the project, and note that the airport will be redeveloped by the time Baha Mar opens. Expectations are that the tourism market will have rebounded by then.

Another issue that has received somewhat less attention in the media is the provision of water and power for such a massive project being built and brought on stream at one time. As we all know, these commodities are relatively scarce on New Providence these days, and there are fears that our infrastructure will be further strained in the short-term.

In fact, BEC will need to generate an additional 25 megawatts of electricity to accommodate the projected power demand for Baha Mar.

And the developer is supposed to cover the cost of a new BEC substation, as well as build a central sewerage system, and a reverse osmosis plant for potable water.

Although there was understandable shock and dismay when Baha Mar's requirement for such a large foreign labour component first became known, public opinion seems to have quickly moved to accept the inevitable - no doubt fully motivated by the recession.

For example, in June of this year the PLP said it would not involve itself in the decision to allow thousands of Chinese workers into the country and seemed determined to let the government twist in the wind. But only two months later they were singing a different tune, based on the state of the economy.

And from the sense of jubilation conveyed by the government since the Baha Mar deal was approved, it seems that the studied scepticism of the past few years was aimed not only at getting the best deal possible in a difficult environment, but also at drawing the opposition into a full embrace of the project's current framework in order to minimize the obvious political risks.

As one well-connected insider told me: "I'm sure there was some political thinking involved, but for the most part it was to get a doable deal."

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November 24, 2010