Economic Crisis In Freeport: A Call To Action

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October 08, 2012

Given the economic crisis now affecting Freeport and Grand Bahama, an action task force committee should be formed under the direction and auspices of government, the Grand Bahama Port Authority (GBPA) and Licensees to determine and effect both short- and long-term solutions. A long-term solution should include the formation of a professional marketing organization to be formed and paid for by the GBPA/GBDevco in accordance with their covenants made to government and the people of The Bahamas in the Hawksbill Creek Agreements of 1955 and of 1960 and in the Freeport, Grand Bahama Act, 1993, to promote Freeport and Grand Bahama for the benefit of the country.

Present state of the economy:

Tourism I am alarmed at the present state of the economy of Freeport due mainly to its tourism base (hotel room visitors) being reduced to less than 25 percent of what it would have been prior to 2004, when two major hurricanes forced the closure of what had been the Royal Oasis and El Casino. It left the Grand Lucayan (formerly Our Lucaya) as the only beachfront four-star Hotel with its mini-casino already struggling these past five years and continuing so to do.

Most people would say our stop-over quality tourism business was near zero and falling. While it was apparent before the 2004 hurricanes that the casino model, on which the Freeport tourist economy was built, was being challenged and would by now have been severely challenged by the popular granting of casino licenses in Florida and in almost every major metropolitan area of the United States, I would submit that no serious initiatives have been made either by government or the GBPA these past 10 years to diversify the tourism product on Grand Bahama, which had always been a poor cousin of its Nassau competitor.I am sure there are many, many reasons why tourism has failed in Grand Bahama. The question is what is going to be done about it?

Continuing downturn

I believe the dismal condition of the tourism market in Grand Bahama is widely acknowledged. Even the Grand Lucayan doors would not be open without monthly injections of cash from its owners, Hutchison Whampoa, nor would its casino be in operation without being subsidized by government. In addition, the government has in the past 18 months subsidized jet flights to five United States cities and continues to do so. All of these efforts, while laudable, are merely band aids.

I do not see any planned, concerted action being taken either by the GBPA or the Ministry of Tourism, government, Hutchison or any of the other few key players to begin to turn this around. Admittedly, if a tourism turnaround can be done, it would probably take three to five years to accomplish and would require new hotel product, massive training and further subsidization of operators, airlift and the like. While the industrial sector on the island continues to do its part, the lack of tourism revenue means that there is no money in the pockets of the thousands of Bahamians that need to be employed: no tips: no money on the street.

Whatever else, the 'yankee dollar' is still critical to a happy Bahamas. The result of all of this is that there are very few businesses in Freeport that are presently, or have in the past four years made money: at least five of our high-end restaurants have closed and dozens more shops and restaurants are close to closure. Further, the lack of quality stopover tourism means there is no chance for the investor real estate market to rebound as seems to be happening in Nassau, Abaco, Exuma and Eleuthera. This Freeport market remains moribund. As it relates to the Grand Lucayan Hotel, there is a recurring rumor that if the occupancy numbers do not improve by christmas, the decision will be taken by Hutchison to close the Hotel.

Given the unhappy history of its operation by Hutchison, this may have an ultimately good result if the hotel is marketed by open bid for sale and is sold to a vibrant hotel group (a la Emerald Bay, Sandals) then the process of tourism rejuvenation can begin. If, however, Hutchison intends to shutter the Hotel this would have a continuing calamitous effect on Freeport tourism and jobs. It has also been revealed that the subsidized flights have now been canceled.

Industrial sector

The industrial sector at the Lucayan Harbour is apparently doing well, though I am certain these players, particularly Polymers and PharmaChem, are suffering under the crippling power costs affecting Grand Bahama.

Polymers has advised that its Freeport plant suffers four times the power costs of a similar U.S. counterpart, so that with Bahamian labor costs being almost equal to U.S. costs, it is unlikely that we will be able to attract any new players to the port area or The Bahamas if such are labor intensive and/or heavy electrical users. It should be noted that while most of the industrial sector jobs are skilled and well paid, they are not in the thousands of numbers that would be sustained by a vibrant tourism industry. We have not had a new player in this sector since 2003.

Is there another Borco, Shipyard or Pharmaceutical/Polymers company out there? I am sure there are probably dozens of smaller plant operators in Europe or South America that export product to the U.S. and Canada that could be attracted to the port area but they would have to be educated about Freeport's existence and its benefits of establishing here. Again, where is the sustained, concerted effort to market/attract such players? Despite the covenants by the GBPA in the Hawksbill Creek Agreement to use their best endeavors to promote and encourage factories and industries, there has never been a professional, established and sustained effort in this regard.

As envisaged by and covenanted for in each of the Hawksbill Creek Agreements (see below), a new sustained multi-year effort needs to be made, hopefully by a joint effort of the public/private sectors (GBPA, Hutchison, licensees, government) to market/expose Grand Bahama to the light industries of the outside world that can benefit from a Bahamas tax free base (but obviously not heavily dependent on electrical usage). Covenants by the GBPA and GBDevco to promote:

1. Hawksbill Creek, Grand Bahama (Deep Water Harbour and Industrial Area) Act, 1955 By the Hawksbill Creek Agreement 1955 and in consideration of the government's granting to it of 50,000 Acres, the creation of the port area and the exclusive administration, licensing and duty free exemptions and the myriad benefits granted to the GBPA for a period of 99 years, the GBPA covenanted inter alia: "1.(3) Use their best endeavors to promote and encourage the establishment of factories and other industrial undertakings, and in particular factories, industrial undertakings, and industries which will make use of the natural resources and products available at Hawksbill Creek such as limestone rock and pine, timber...".

2. Hawksbill Creek, Grand Bahama (Deep Water Harbour and Industrial Area) (Amendment to Agreement) Act, 1960. By the 1960 Hawksbill Creek Agreement Act, the intent to change the emphasis of Freeport from an industrial center to a touristic and real estate investment area, was specifically provided for in the provision and covenant to build the Lucayan Beach Hotel. In the 1960 Amendment, the GBPA's 1955 covenant to promote the Port Area was reiterated and expanded to include a covenant by the GBPA: "to promote and encourage the establishment of other lawful enterprises which shall appear likely to be of economic benefit to the colony." My note: "Benefit to the colony" - it was always envisaged that Freeport would be of major benefit to the country as a whole.

3. Freeport, Grand Bahama Act, 1993. By this Act, in consideration of certain covenants made by the GBPA and GBDevco therein, an agreement was entered into by government with the GBPA and GBDevco to provide for the extension of the Real Property Tax Exemption to any land within the port area for a further 22 years from the August 4, 1993.

By the following covenant, the GBPA and GBDevco covenanted in 1993 to: "18. Establish an organization to promote Grand Bahama internationally." So far as I am aware, such an organization has not been established or certainly not established within the meaning and intent of the covenant. Thus the need, I believe, to establish such an organization now and to link the establishment of such to a public/private enterprise with government and the licensees to be financed by the GBPA and GBDevco to a specified figure. It is interesting to note that the government would have recognized the need to market and promote Grand Bahama in a professional manner in 1955, 1960 and again in 1993 and such need was recognized by the government and the GBPA to the extent that such was statutorily covenanted for. It should be noted that GBDevco, as the largest single property owner of land in Grand Bahama if not The Bahamas, was made a direct party to the Act by the government and, of course, is the major benefactor of that statute. What if this organization had been in place for the five years before the economic boom of 2002-2007? We would not have been the forgotten island.

Government intervention

Why should the government care to be proactive in Freeport when most of its duties and privileges are vested in the GBPA?

1) Freeport remains the second city of The Bahamas and Grand Bahama has the second largest populated Island;

2) A vibrant Freeport can attract Bahamians to live and work and can be a major tax source, even as a 'free port'.

3) Freeport is no longer a foreign enclave: over 90 percent of its licensees are now Bahamian.

4) For the last six years in particular, we have lost population (some say by as much as 20 percent) because of dwindling tourism and investment: this puts more strain on Nassau and the government.

5) The GBPA and its ownership families have consistently, over these past 20 years, divested themselves of their role as owner/operator of the port area: they have sold all or part of the power company, sanitation services, GBDevco, the harbor and the airport, so that by itself, the GBPA is no longer an economic force but remains a source of political and administrative power to the ownership families. Its role is only now that of a regulator/licensor, whose only real source of income is the collection of license fees. The ownership interests of the families are held mostly in separate entities and the families remain the owners of 50 percent of GBDevco, the harbor, the airport, etc. GBDevco, the harbor company and the airport company are all under management control of Hutchison, the owner of the other 50 percent of these companies. The families also own the water company outright and considerable, separate from GBDevco real estate interests in Grand Bahama.

6) With its vast development-ready property potential and modern infrastructure already in place, once the 'development engine' was started it would take 50 to 100 years to build out Grand Bahama providing generations of future Bahamian job growth.

7) Particularly since the death of Edward St. George, there seems to be evidence of bad blood between the ownership families and Hutchison to the extent that some say that Hutchison, as the managing partner, will take no action that may benefit their co-shareholders. Hutchison does not need a successful Grand Bahama - we do. The big question: what would cause Hutchison to become proactive in Grand Bahama?

8) It appears the GBPA and GBDevco have not lived up to their statutory covenants to promote Freeport.

9) It can be argued that the GBPA is in the nature of a public corporation that has not lived up to its mandate.

10) The citizenry and future of Freeport are at risk.

GBDevco

The Grand Bahama Development Company Limited (GBDevco), the successor land-holding company of the GBPA, is the holder of some 70,000 acres of land in the port area, much of which is developed, fully serviced, vacant and subdivided and/or waterfront property in and around the Grand Lucayan Waterway and includes Barbary Beach to Old Freetown Beach of some 4,000 - 6,000 acres alone. This is prime beachfront property. As noted, the ownership families own GBDevco with Hutchison (50/50), and Hutchison have had management control of GBDevco since 1999.

Despite most of The Bahamas having benefitted from the world-wide boom in real estate development of 2001-2007, GBDevco was not successful in the sale of any significant acreage on which development took place during this period. Certainly, no major touristic or condominium development program has been undertaken by GBDevco itself within the last 22 years. Grand Bahama again, perhaps due to the lack of a professional sustained marketing program and despite having 60 miles of beach and tens of thousands of acres of prime Bahamian property, has consistently lagged behind the rest of The Bahamas in property value and sales and, this, despite having arguably the best infrastructure in the Caribbean and having the advantage of no real property tax.

Real property tax as an engine for development

The exemption of real property tax was first granted by the Hawksbill Creek Agreement in 1955 for 35 years and again extended in 1993 for 22 years to 2015. If no further extension is granted by government, then the tax that is now applicable to all the rest of The Bahamas will apply to the port area in 2015. There are two schools of thought with respect to whether the exemption should again be extended:-

(1) One is that Freeport deserves an extension of the exemption because it has still not reached fruition after more than 55 years (even with the 'advantage' of the exemption) and its imposition now will further hurt prospects. This argument was used in 1993 and was probably relevant then; or alternatively

(2) There is a growing school of thought that notes that even with this exclusive exemption, Freeport's real estate market has historically lagged behind (and as noted is now moribund) all other 'hot' areas of The Bahamas: Abaco, Harbour Island, Paradise Island, Lyford Cay, Old Fort, Albany, Exuma, all of which have always had real property taxes. Moreover, the exemption may now be working against the interest of the sale and development of the thousands of acres of property already sold in the port area: there are many lots, parcels and tracts of land now held by non-Bahamians in the port area that are not being marketed, or offered for sale, or offered at competitive prices because there is no carrying cost to the owner.

A primary example of this is a 26-Acre beachfront tract on famous Lucayan Beach owned by a non-Bahamian, that has been marketed for sale for the past 10 years and has not moved. A part of the reason for this is the lack of the international sales marketing effort, but also because the price of this land is arguably too high. If that owner had to pay $300,000.00 a year in real property taxes, most likely major efforts at marketing would have been made and the price made more attractive for sale and a new owner would be in place with the intention to develop. This present owner would have actually benefitted from the sales and marketing efforts of the GBPA and the activity created by hundreds of other sellers (who would now be prompted to sell because of the tax). Therefore, it is argued that real property taxes can be seen as an inducement to sale and development.

Land bank?

I am leaving aside the oft expressed view that Hutchison, noting its lack of impetus in sales and development, has always viewed GBDevco as a 'land bank', and even the families seem quite content only to sell to investors that arrive on the island by happenstance.

You, however, will be immediately convinced that by the covenants to market and promote made by the GBPA to the government in the Hawksbill Creek Agreement, it was never intended by government that this land would remain under-developed and not actively marketed for sale, all for the benefit 'of the colony'.

Conclusion

Accordingly, as it is critical to GBDevco and its ownership partners not to have to pay real property taxes on their vast holdings, the GBPA and GBDevco will no doubt be applying to the government for such extension touting it as a benefit to everyone in the port area. I submit, this is perhaps a once in a lifetime opportunity, given the 'perfect economic storm' Freeport is now experiencing, for government to make definitive demands of these parties to live up to their prior commitments made and to 'fix' Freeport in the short and long term.

Short-term solution

There are two projects that I believe can be given immediate impetus to come to fruition within the next 12 months.

Cruise port

Cruise ports have been built in Grand Turk, Cozumel and Belize to great results. While the government has been able to triple potential cruise ship visitors to Freeport in the past three years with five ships each of 2,500 passengers visiting per week (up from one per week) because of the 'ugly' industrial look and isolated location of the harbor, and the lack of activities offered to the one-day visitor, approximately only 10 percent of the passengers disembark on Grand Bahama to enjoy what we have.

The other major issue is that Freeport ranks in the cruise ship industry as number 37 of 37 Caribbean cruise ship destinations: a Ministry of Tourism problem, which has bedeviled the ministry for more than 20 years, but which needs to be solved, and can be immediately solved by a salubrious cruise port in a lush beachfront area of the island which would create excitement for the tourist. Some three years ago, the government acquired some 80 acres of beachfront land next to Williams' Town for this purpose but the project died. I understand the cost of this cruise port and beach amenities would be $100 million which could easily be raised by any one or a collaboration of the following:-

i. Cruise line support: financial and/or commitment to use;

ii. Government bond issue or international loan support;

iii. All supported by cruise ship rentals, departure tax returns. An exciting cruise port would facilitate the disembarking of 2,000 or more tourists per day and would support the creation of a first class restaurant/bar/ shopping and entertainment center at the site. While this does not take the place of the fly-in/stop-over tourist, it will go a long way to restore the 'money on the street', which we need desperately. Hundreds of happy jobs can be created by the government loan support for Bahamian entrepreneurs in the tour-car, dive-boat, day-boat and beach excursion nature-tour business. This project can be done and, quickly, but it needs an Action Task Force made up of government, the GBPA and licensee leadership to be funded by the GBPA and GBDevco. Personally, I would hope this task force would be chaired by the minister for tourism; himself, a Grand Bahamian.

World Mart

Much attention has been paid to a proposal spearheaded by local entrepreneurs for the establishment of a World Mart here in Freeport, probably in the sea and air center between the harbor and the airport. It is thought to be the only project presently on the drawing board that could truly 'transform' Freeport's moribund economy, which has been perpetually struggling especially since the 2004 hurricane season and Royal Oasis closure.

This World Mart would be designed as a buyers and merchant market, where manufacturers and businesses from Asia and elsewhere can show their products and wares to western hemisphere clients. This project has already been described as "a game changer" for Freeport and the entire Bahamas. World Mart has been estimated as having a $400 million annual economic impact, creating between 6,000 - 8,000 total jobs in Grand Bahama and would be housed in a one million square foot facility and would create between 3,000 - 4,000 direct jobs. The project's build-out was projected to create 600 - 800 construction jobs, also helping to make a dent in Grand Bahama's 21 percent unemployment rate. It has been predicted that once fully operational, World Mart would take-up 75 percent of Grand Bahama's existing hotel room inventory filling between 2,500 - 3,000 rooms per day.

Let me say immediately that I have no professional or commercial interest in the project, but it appears to me that while everyone, including the government, the GBPA, the Ministry of Tourism and the Grand Bahama Chamber of Commerce, are all expressing interest in this project, this is the time when the parties should take a proactive stance and embrace this project and its parameters and see what could be done to make this project a reality, whether by the applicant or any other major investor. The questions to be answered would be: a. Is the business plan feasible? b. Do the investors have the expertise and wherewithal? c. What will be the benefit to Freeport economy? I readily agree that in the normal course of events, a proposal by an investor is made to the proper authorities and if the investor is deemed to have the expertise and the wherewithal to facilitate the project, the same is approved.

The difference is that this project, if feasible, would be a game-changer for Freeport attracting thousands of jobs, visitors, with the compounding positive effect on air-lift and restaurant, real estate and business . Most of the major players to come to Freeport in the past 20 years all came to Freeport under the auspices of the GBPA who became or remained partners in the proposed venture. The GBPA, in these cases, was obviously proactive. Again, this project requires a dedicated task force made up of the government, the GBPA, GBDevco and Licensee leadership to be funded by the GBPA/GBDevco to make this project, or one like it, happen if possible, and bring prosperity back to the island.

My choice for chairman of this task force would be Exuma and Ragged Island MP Gregory Moss.

Long-term solution

Recognizing the absence of any dynamic leadership in the GBPA and Hutchison and enabling them to act productively in promoting and bringing investment to the port area, the government should cause the GBPA and GBDevco to form the marketing organization promised in the 1993 Act to be funded by them. The managing board should be comprised equally of government, the GBPA and the GBDevco and the Licensees to be financed to at least $2 million per year, or such figure that experts agree would be needed to finance such a meaningful, effective initiative.

Conclusion

I believe I have fairly laid out the challenges facing Freeport and Grand Bahama today and the need for immediate action to be taken. In my opinion, this needs to be driven by the government on behalf of the Bahamian people. If action is taken, the prospects could be bright and exciting: the cruise port and a World Mart could easily be started within a six-month period and will immediately add impetus and confidence to the whole of Grand Bahama and indeed the country. The professional marketing organization can be in place well within six months. I consider we also need to have GBDevco working with the newly created marketing organization to go out and convince a world-class developer to create a golf course, gated/beachfront/residential community next to the hotel district or to include a boutique hotel a la Albany or Bakers Bay. Again, all with land incentives: something to ignite development across the island. Remember, ultimately, we are all in this together.

• Terence Gape is senior partner and head of the Freeport chamber at Dupuch & Turnquest & Co.

Click here to read more at The Nassau Guardian

News date : 10/08/2012    Category : Business, Nassau Guardian Stories

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