By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
The Freeport Container Port’s market share could be slashed by 20-30 per cent if the city’s expiring tax breaks are not renewed, with more than 60 per cent of existing cargo volumes put “at risk”.
This warning was relayed to the Christie administration in November 2014 by a report from McKinsey, the international consultants, which warned of the dire consequences for the Freeport Container Port if existing Business Licence and real property tax exemptions are not renewed.
Those incentives expire in less than three weeks time, and McKinsey warned that failure to renew them could result in a 15-20 per cent decrease in the operating margin for Mediterranean Shipping Company (MSC), the Container Port’s major customer.
“Full tax pass through could decrease MSC’s operating margin by 15-20 per cent, and put more than 60 per cent of existing transhipment volume at risk of being moved to other ports,” McKinsey warned.
“The increase cost of operations at Freeport could decrease its market share by 20-30 per cent in this highly competitive industry. There is material risk that MSC could reduce transhipment volumes considerably if Freeport Harbour and Freeport Container Port pass taxes on. The Government stands to lose more than $2 million in Customs duties.”
In its interviews with Freeport stakeholders, McKinsey reported that it was bluntly informed that “MSC would leave, and no new shipping lines will enter”, should the increased burden from the non-renewal of the city’s tax breaks be passed on to the shipping line.
Detailing some of the comments, which appear to have come from MSC executives themselves, McKinsey said it was told that any new or increased taxes would make Freeport “uncompetitive”.
The consultants’ report, which had been withheld from the Bahamian people and Freeport residents for 14 months, was finally disclosed yesterday via its filing with the Supreme Court in response to the Judicial Review challenging the consultation process over the Hawksbill Creek Agreement review (see other article on Page 1B).
Based on a $183 per twenty-foot equivalent unit (TEU) container price, McKinsey said MSC would face a $4 million annual Business Licence fee if the Government elected not to renew that particular exemption.
And, should the Freeport Container Port elect to pass on 100 per cent of a new real property tax to its main client (and minority shareholder), MSC’s operating income margin would fall from 4.7 per cent to 4 per cent. TEU prices, meanwhile, would rise by $10 per container.
“Greater than 60 per cent of volume could be at risk when fees increase by $10 per TEU (100 per cent pass through of property tax and Business Licence fee), if MSC already pays lower than average transhipment fees in Freeport,” McKinsey estimated.
“Greater than 75 per cent of volume could be at risk in an aggressive case if MSC currently pays equal fees at all ports.”
Illustrating just how vulnerable the Freeport Container Port is to sudden changes in tax policy, McKinsey said MSC previously “shifted its transhipment department and 10-20 per cent of volume in the past from Freeport” to its Dominican Republic port of Caucedo.
This was in response to “labour issues” and the 1 per cent Customs administrative processing fee introduced in the 2013-2014 Budget, the latter of which has now been removed.
The Christie administration’s desire for MSC and its partner, Hutchison Whampoa, to deliver on the Phase V expansion of the Freeport Container Port, worth $250-$300 million, means there is a strong likelihood that Freeport’s expiring real property tax and Business Licence exemptions will be renewed - and the McKinsey ‘doomsday’ scenario avoided.
Hutchison Whampoa, when it met Prime Minister Perry Christie and his delegation in London in December, explicitly tied the Container Port expansion and other investment activities in Grand Bahama to certainty that the expiring tax breaks will be renewed.
And the Government’s deepening relationship with MSC, involving the recently-signed Heads of Agreement for the private Ocean Cay cruise port and other maritime and training-related initiatives, means it is unlikely to change Freeport’s investment regime.
McKinsey’s report pointed out that the Freeport Container Port already faced numerous Caribbean competitors, with the likes of Jamaica, Cuba, the Dominican Republic and Colombia all dredging and investing in the expansion of their deep water container ports in preparation for the Panama Canal expansion’s completion.
“Freeport’s electricity costs and moves per crane per hour lag other transhipment ports, which creates competitive pressure,” McKinsey said.
It added that Freeport’s 30 moves per crane, per hour, trailed Panama, the Dominican Republic and Colombia, and only bettered Kingston, Jamaica, among regional rivals.
With Caribbean transhipment capacity expected to increase by 50 per cent come 2020, McKinsey agreed that there was little scope for MSC and the Freeport Container Port to increase prices.
Comments
killemwitdakno 8 years, 2 months ago
Why was the 1% fee removed?
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