A few weeks ago, the country was informed that Kerzner International (formally Sun International) had reached an agreement with the Government of The Bahamas over incentives and concessions that would lead to the development of Phase III of the Atlantis Project.
Now that this historic event is off the front page of local newspapers and no longer the lead story of every television and radio broadcast ﾖ we thought that we would examine the import of this new investment.
To briefly recap, Phase III calls for an investment estimated to be about $600 million and will include the following:
* A 1200 room hotel;
* Three luxury villas at the Ocean Club property;
* A 20,000 square feet retail/restaurant development around the marina;
* 120 new timeshare units at Harbourside;
* A new golf course on Athol Island;
* Extension of the existing marine park and a new dolphin encounter attraction to rival SeaWorld in Orlando; and
* An additional 50,000 square feet of convention space.
It is absolutely indisputable that this investment is most important for our country, particularly now when the global economy is soft and the local economy is in desperate need of a ‘shot in the arm’.
The Bahamian economy is heavily dependent on foreign investment and this new investment resonates as a tremendous vote of confidence in The Bahamas.
The last time when Kerzner International commenced the construction of the Royal Towers, it proved to be the catalyst for a seven-year construction boom that saw some $2.5 billion being invested in new construction. Another overlooked but most interesting fact is that during the past 10 years, there has actually been a six per cent contraction in available hotel rooms on New Providence/Paradise Island, while net new inventory has been added to the market of virtually every competitor of The Bahamas.
In 2006, The Bahamas expects to get ‘Convention Tax’ exemption from the U.S. authorities. This was a major concession sought by The Bahamas. We are told that to ‘play in this game’ a resort has to come to the table with blocks of at least 3,000 to 3,500 rooms for the major conventions. The whole of New Providence/Paradise Island has about 3,200 rooms in inventory, ranging from five star qualities to dubious quality. Additionally, some of the new mega resorts in Las Vegas boast close to one million square feet of convention space and meeting rooms. Today, the entire Atlantis complex has about 100,000 square feet of meeting space. Therefore, having procured the much sought after exemption, the reality is that ‘as is’ we are unable to step up to the plate as far as facilities are concerned.
The Kerzner folks, on the other hand, understand the business they are in, and recognize the need to build more infrastructure in order to simply compete. However, for them to commit to further significant investment they needed to structure the deal in a way that made financial sense to them and their owners. In a teleconference with analysts, it was stated that Kerzner International needed a 20 per cent return (internal rate of return to equity investors) in order to proceed.
The government on the other hand, needed the foreign investment and all the benefits that come along with it. We say all of this to help our readers understand the various factors at work in this single decision.
In the short-term, what is extremely important to the economy is the timing and magnitude of the investment cash flows into our economy. Based on all the reports that we have been privy too, it appears that the money will be invested, more or less, as follows:
Year Investment
$ millions
2003 25.0
2004 70.0
2005 225.0
2006 275.0
2007 50.0
What this table demonstrates is that the largest impact of this investment will be felt in the years 2005 and 2006. For the remainder of this year the impact will be negligible. However, from 2004 onwards, the benefits in the form of construction activity and other indirect benefits will definitely impact our economy in a noticeable and tangible way.
Between now and late 2004, we need to continue on a path of fiscal responsibility and resist the political temptation to spend money before we earn it. More than ever, the country must match its spending to actual revenues and not expected revenues from these various announced projects.
On May 20, under the caption Structural economic reform, we wrote “… the hard cold facts are that as the Bahamian economy is presently structured ﾖ there is very little a government, any government, can do to directly stimulate the economy.” Most serious students of the Bahamian economy will readily admit that foreign investment is the engine that drives our economy. Until we face up to the need to restructure the economy, without foreign investment – our economy stagnates.
Having laid the groundwork, we wish to spend the remainder of the article talking about the concessions granted to Kerzner International. An article in May 28 edition of the Wall Street Journal quoted Prime Minister Christie as saying that the concessions granted had a value of $93 million. Butch Kerzner in a conference call with analysts expressed the value of concessions as being between 15 per cent – 20 per cent of the capital investment or somewhere between $90 million and $120 million.
The real value in the concessions is not customs duty and stamp tax relief but rather the extension of “special casino incentives for a further period of 11 years”. To be able to operate a major casino free of taxes and levies is worth its weight in gold … literally. By the time this article is published, perhaps we will have a thorough analysis of the value of that particular concession. We suspect that this value is not reflected in any of the estimates, neither was it included in the analysis of the 1992 agreement ﾖ so let’s not try to politicize this particular point. But as objective analysts, we need sufficient information if we are ever to have a proper cost/benefit analysis of such investments, which will have implications for future deals. If and when the Heads of Agreement becomes public, we intend to do a thorough analysis of the concessions granted for our readers.
Another point of great interest is the intention to make Kerzner shares available to Bahamian investors. We view this as an excellent opportunity for Bahamians to participate in the most successful company to date, in our number one industry. For the sake of balance, we must point out that there is risk associated with equity investments, in that share prices can go up or down over time. However, over the long-term investors should be well rewarded.
We view this event as a first ‘controlled’ step towards the liberalization of exchange controls as it relates to portfolio investments. While this represents a limited relaxation, we would have preferred more than a singular investment option at this time. Nonetheless, we regard this as a positive step in the right direction.
In 1992 the PLP criticized the government of the day over the first agreement and no doubt the FNM will criticize the current administration over this agreement, notwithstanding the substantive similarity of both agreements. We are less concerned with the political rhetoric and more concerned about stimulating this anemic economy.
In conclusion, we applaud the Government for getting this deal done. Our position is that it is important that it gets done and that the mere vote of confidence by Kerzner International will be the catalyst for other investments which will benefit us all.
Source: The Nassau Guardian
