The Parliament’s decision to unanimously approve Baha Mar’s request for 8,100 work permits is troubling...

Decision to approve Chinese work permits troubling
BY LYNDEN NAIRN



At the risk of prejudicing my views on this matter, let me remind your readers that “a bird in the hand is better than two in the bush”.

The Parliament’s decision to unanimously approve Baha Mar’s request for 8,100 work permits is troubling because it appears that all of the relevant factors were not considered or even known.

At the outset, I want to make it clear that Baha Mar has the right to invest whatever amount it wishes, wherever it wishes and whenever it wishes within the confines of our laws.

I also believe that consistent with the tenets of our capitalistic economy, Baha Mar has the right to make good and bad business decisions. It is not right, for instance, to deny approval of a Bahamian project on the basis that it would create a glut of room inventories in the marketplace, even though one would expect investors and their financiers to have regard for that possibility.

The labor issue is a significant problem not only because it robs Bahamians of maximizing their benefits from the project, and not only because on its face it puts Atlantis at a disadvantage, but because it represents a business deal that apparently could not be financed if the financier were not afforded certain privileges.

During Atlantis’ multiple phases, the government thought that it was in the best interest of the Bahamian people to require Atlantis’ labor component to be at a certain level. Undoubtedly, that imposition caused Atlantis to engage labor at a higher cost than it would if that condition did not exist.

A few years later, in order to ensure that financing is secured for a project, the government has decided to allow Baha Mar to engage almost three times the number of foreign workers as Atlantis. That circumstance means that Baha Mar is able to construct its facility at a lower cost than Atlantis.

That places Atlantis at a significant competitive disadvantage since the cost of construction drives capital requirements, financing costs, room rates and ultimately profitability. Whatever one’s opinion with respect to Atlantis and Baha Mar, one has to at the very least appreciate that this is a legitimate concern for Atlantis.

Indeed, it really ought to concern all of us since this state of affairs creates uncertainty in the minds of current local and international investors as to whether the government might change the playing field and render their business models not feasible.

This is a very dangerous matter and should not be brushed over in our effort to cause Baha Mar to happen. Atlantis’ investment is already in the ground — it is what it is. A decision by the government should not be the event that renders it less competitive — not in a capitalistic environment.

Some persons have criticized the agreement between Atlantis and the government. However, it needs to be remembered that businesspersons must seek to guard against the kind of risk that Atlantis faces today. Perhaps one is saying that such a deal is not in the country’s interest. The fact is though that no reasonable government should be afraid to execute such a deal since no reasonable government would wish to jeopardize a major investment project.

That said, I believe that the government has a moral responsibility to not grant a better deal to Baha Mar. Foreign and local investors must be able to trust that the government will ensure that the playing field is level at the time of their investment and after as well.

No investor, local or foreign, would wish to invest in an environment of uncertainty. This situation could jeopardize future investments in The Bahamas.

Indeed, Sir Sol Kerzner has already said that Atlantis phase four is unlikely. Already, therefore, the cost of granting Baha Mar 8,100 permits to construct a $2.6 billion hotel is $1 billion in future investments. The question is how many other projects will be deterred?

Moreover, if Atlantis’ phase four project were to reflect the Bahamian labor component that was imposed on it several years ago, they are likely to have engaged 3,500 Bahamians, the same number that Baha Mar will hire.

I also found it rather revealing that the labor cost allocated to the 3,500 Bahamians that Baha Mar intends to engage is $200 million over four years. That equates to $275 per week inclusive of national insurance and other benefits.

What is equally striking is that having increased the Bahamian component by $200 million, the Chinese labor component remains unchanged. Assuming that information is complete, and frankly there is no reason to believe that the Prime Minister was complete, then it simply means that Bahamians will be given contracts to procure materials. Assuming such materials are required to be sourced in China, then this amendment constitutes nothing.

What is more, if it is true that as the Prime Minister suggests, the additional $200 million is intended to move Baha Mar’s cost closer to Atlantis’, then what is the incremental cost of the Baha Mar development?

Now let’s say that Baha Mar makes the argument that its total development cost was not lowered as a result of the favorable labor allocation. That is quite possibly true, but does that make the government’s situation any better? Perhaps not.

Here is why: It is indisputable that the Chinese government’s decision to provide the financing is based on the excessive work permits and the sale of materials for that project. Therefore, the inducement takes place broadly at the level of financing, not at the level of project development cost.

That makes Atlantis’ argument even more compelling since in that instance the issue is not merely the competitive disadvantage that is driven by development cost, but the entire project. In other words, if in the absence the incremental incentives the Chinese would refuse to finance the project, the government has unwittingly given Baha Mar a financing advantage. Atlantis can therefore argue that the entire project represents an abandonment of the agreement, not just the additional labor and land cost that they incurred. Even commercial banks can argue that this deal places a competitive bar on them that they cannot reach.

I do not seek to carry water for Atlantis, much less commercial banks. I simply believe that it is essential for us to consider the consequences of the decisions we make.

The fact is that this arrangement has far reaching consequences. I only wish that the Christie administration and the Ingraham administration had not messed up Baha Mar’s original plans so badly. They owe Izmirlian, Atlantis and the Bahamian people an apology and even their resignations.

I now wish to consider a related but slightly different matter. Bahamians will recall that during the various construction phases of Atlantis, many persons argued that it was inappropriate to grant Atlantis all the incentives that were given. Undoubtedly, there were smaller investors, Bahamians and others, who felt that their business models were being threatened by the Atlantis subsidies or perhaps they felt that they should have received similar incentives, for whatever reason.

I believe a strong argument can be made by those who were aggrieved. That points to the fact that we need to have clearly defined concessions/incentives in order to create a level playing field and remove uncertainty and arbitrariness from the process. The latter leaves too much room for abuse and under the table dealings. Furthermore, deals should not be made in secret and persons who benefit in any way as lawyers, developers, etc., should not vote in our Parliament on these specific matters.

• Lynden Nairn is a Chartered Accountant, and president of Colina General Insurance.

11/24/2010

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