Question

Background

In this hypothetical scenario, you are the Chief Executive Officer (CEO), of a company, Island Ports Limited. Your business, is a global business, with shipping ports in all of the major English speaking Caribbean countries. On January 7, 2020, you signed a Heads of Agreement with the Government of The Bahamas to invest $120 million during Phase I to develop a cruise port on the island of New Providence. As you can appreciate, the signing and the commitment of your shareholders to this project, preceded any information available to your company and its shareholders with respect to the potential impact of the coronavirus, i.e. COVID-19.

Concessions granted to Island Ports (hypothetical scenario)

The following were the concessions granted to Island Ports during the signing of the Heads of Agreement:

i. A twenty (20) year tax holidays in relation to the payment of any real property tax for this project. Island Ports, Chief Financial Officer, has estimated that the tax forgiveness by the Government of The Bahamas is equivalent to $1.01 million annually.

ii. A ten (10) year tax waiver on the payment of Value Added Tax on all goods imported for the construction of the port and goods sold to the public, once the port is operational. The CFO estimates that the gain to Island Ports as a result of this tax concession, is conservatively estimated at $5.4 million annually.

iii. A ten (10) year waiver of import duties on all inputs needed in the construction of the port. The CFO has estimated that this import tax waiver amounts to an average of $2 million over the next ten (10) years.

iv. A land grant of ten (10) acres for the construction of the port. This is land that is owned by the Government of TheBahamas and will be given to Island Ports for a nominal price of $10. The land has a market value of $15.5 million.

Commitments from Island Ports to the Government and People of The Bahamas

In light of the concessions granted to Island Ports as listed above, the company has committed the following to the Government and people of The Bahamas:

i. Five hundred (500) direct jobs during the Phase I construction of the port. During the initial signing of the Heads of Agreement, in January, 2020, there was a commitment for the construction to start September, 2020, with the first phase completed May, 2021.

ii. Phase I of the project is estimated to cost $60 million. The entire sum, i.e. $60 million needed for the construction of this phase, will be sourced from external investors. These investors had pledged the financing prior to the COVID-19 pandemic.

iii. Some local ownership by offering shares to the general public. The public is expected to have a 40% stake in the project. It is estimated that this 40% stake will provide a net benefit to the domestic economy of $40 million over the next 5-7 years.

iv. By way of the added economic activity created as a result of Island Ports, the government is expected to get an added $15 million in revenues in head tax revenues from cruise passengers to the new port. This additional $15 million in revenues is predicated on the port being operational August 1, 2021, which means that construction must begin September, 2020.

The following is the outlook for The Bahamas, based on baseline data (as at 2019) taken from the Central Bank Quarterly Digest at www.centralbankbahamas.com and projections for 2020 based on these baseline numbers:

Table I: Key Metrics for The Bahamas

Key Metrics	As at 2019 (Pre COVID-19)	Impact – Projected 2020
National Debt as at December, 2019 ($mils.)	$8,749	$10,413
Debt in Foreign Currency ($mils.)	$2,618	$4,282
Foreign Reserves as at Feb., 2020 ($mils.)	$2,001	$900
Gross Domestic Product (2019) ($mils.)	$12,900	$10,900
National Debt as % of GDP	67.8%	95.5%
Tourism Expenditure as at 2019 ($mils.)*	$2,817	$1,665
Unemployment as at November, 2019	11.0%	24.8%
Government GFS Deficit ($mils.)	($377.6)	($1,664)

• The tourism expenditure of $1.665 billion does not take into account seasonal adjustments/variations, which may result in even a lower level of receipts from tourism.

You have just been appointed the Chief Operating Officer (COO) of Island Ports. You have over twenty years experienceadvising CEO’s on strategic decisions. In addition to your experience as an advisor on strategy, you are accomplished academically. You were a graduate of the University of TheBahamas and later pursued your Masters at Yale in Analytics and Strategy. Needless to say, there is high expectations from your office, in helping the company, Island Ports on the way forward.

Decision

Island Ports has to decide as to whether it wishes to move forward in September, 2020, with the start of construction of Phase I of the construction of the cruise port in New Providence. Island Ports investors are also reluctant to move forward in the current environment. The Government of The Bahamas is also applying pressure to Island Ports to get started with its construction, as this project will provide much needed jobs for the economy, at a time when jobs and incomes are really needed. The government has also reminded Island Ports of the generous concessions that were granted on the condition that the project gets started on time. While the Government of The Bahamas is applying pressure to Island Ports, the company has reminded the government that its project will provide tremendous benefits to the country, through its efforts and ingenuity.

As the COO, you are asked to advise the company on the way forward by way of answering the following questions:

i. Should Island Ports move forward with the construction of the cruise port with effect from September, 2020. What is the rationale that would support such a move? What is the rationale for not moving ahead?

ii. The company is also interested in knowing, from the perspective of the government, how can the company be persuaded that it should move with the construction at this time? In other words, assume that Island Ports is reluctant to move forward, what would be factors that would force Island Ports to move ahead with construction in this environment?

iii. In light of the metrics and the information provided in this scenario, what is the impact for the domestic economy; and for the company in moving forward with this project?

iv. What are your recommendations from the perspective of (a) Island Ports; and (b) the Government of The Bahamas in relation to whether the project should move forward.

v. Any other thoughts.

APPENDIX

Key Metrics – The Bahamas

Assumptions and other notes:

• A key assumption is that there will be some semblance of normalcy, circa August, 2020. The length of time and the depth, i.e. sectors impacted are all factors that could impact the metrics.

• During the period of the Financial Crisis, i.e. Great Recession, the unemployment statistics in The Bahamas ranged from around 12% to a height of 16.8% in 2011. This Pandemic, i.e. COVID-19 is expected to be more severe when compared to the Great Recession of 2008, which was concentrated primarily within the area of Financial Services/Financial Markets, COVID-19 is much broader in scope affecting all sectors/markets. The projected rate is 24.8%. This is conservative, considering that at the height of this crisis, the U.S. is projecting 32% , as a result of COVID-19, ending at about 12% by year end 2020, based on recovery starting third quarter.

• The projected increase in the national debt, reflects the existing debt stock of $8.749 billion and the projected GFS deficit of $1.664 billion. The increase in foreign currency borrowing, reflects that new borrowings will come exclusively from outside rather than internal borrowings in B$.

• It is conceivable that the impact to GDP depending on the length of the shut-down, some estimates are on the high end of closer to $2.8 billion of the GDP impact. I have looked at a more conservative estimates of $2 billion.

• The foreign reserves from most estimates, is expected to be reduced to about $900 million to the end of 2020. This reflects reduced receipts from tourism. Also, the fourth quarter there is usually a run of the reserves for Christmas shopping, even in an economy in recession, there will be draw downs.

• In calculating the GFS (based on Government Finance Statistics, IMF defined basis of calculating deficits), the government’s deficit of $1.064 billion, is based on tourism share of the economy of 65% (most estimates are closer to 70%, conservative estimate) and government’s share of the economy of circa 20%. Based on calculations, the loss by way of tourism expenditure based on arguably a return to some semblance of normalcy in August, 2020 is $1.152 billion. Using a factor of 2.98, equivalent to a proxy of a multiplier, considering that tourism with direct and indirect effects, government’s GFS fiscal deficit will widen from the 2019/20 projection of $377 million to $1.064 billion. The $1.064 billion is just the deficit attributed to the decline in economic activity, taking into account the $600 million thereabouts of subsidies to individuals and businesses, the GFS deficit is closer to $1.664 billion.

Table I: Key Metrics

Key Metrics	As at 2019 (Pre COVID-19)	Impact – Projected 2020
National Debt as at December, 2019 ($mils.)	$8,749	$10,413
Debt in Foreign Currency ($mils.)	$2,618	$4,282
Foreign Reserves as at Feb., 2020 ($mils.)	$2,001	$900
Gross Domestic Product (2019) ($mils.)	$12,900	$10,900
National Debt as % of GDP	67.8%	95.5%
Tourism Expenditure as at 2019 ($mils.)*	$2,817	$1,665
Unemployment as at November, 2019	11.0%	24.8%
Government GFS Deficit ($mils.)	($377.6)	($1,664)

The tourism expenditure of $1.665 billion does not take into account seasonal adjustments/variations, which may result in even a lower level of receipts from tourism.

Answer 1

Answer (1)

• As the coo of the company Island Ports I will suggest to move forward with the project. The reasons will be : firstly the company must have gone to great lengths to strike the deal with the government and secure all the concession and benefits will actually be hard to get again.
• As per the health stats the lockdown will end till September and many companies will try to invest in places like this . Additionally the total cost benefit the company will get is $21.91 million pa and additionally $ 2 million in ten years.

Answer 2️⃣

• If the company refuses to go forward with the project then the government of Bahamas should try and persuade Island Ports to go on with the project. The government can reiterate the importance of concessions mentioned above and remind the company of the huge benefit and profit it is going to gain from this project. Show the bright side of things and implant optimism.
• Gather data that shows the lockdown will end till September and things will be normalised again. Inform about the importance of the employment and target the morality of the company. Lastly tell them that they are not the only company in the world if nothing else works

Answer (3)

The government of Bahamas has agreed for providing a lot of concessions to island ports which can cause a negative impact but to balance the situation they have imposed certain obligations on the company. Like 500 direct jobs to the people which will definitely improve the 24% unemployment ratio boosting the economy. Then 40% shares will be public that will go directly into the welfare of public institutions helping to boost yeh economy. After ten years of tax waiver the company will have to pay taxes which will eventually add to the benefits. In a long run the project will prove beneficial to the domestic economy.
Answer (4)

ISLAND PORTS
- The project is of huge economic benefit to the company but only if executed on time so the people supervising this project should make sure to meet the deadlines anyhow.
- The government will start levying tax after 10 years so the company should make an internal policy to maximise it's profits in the first ten years and take full benefit of tax waiver.
BAHAMAS GOVERNMENT
- The country is facing serious unemployment issues with 24% of the eligible people unemployed so the government should utilise this opportunity to invest as much human resources in this project as possible.
- As 65% of GDP comes from tourism the government should make sure to advertise this construction at a great extent to attract customers globally who will invest in real estate in Bahamas.