The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s own consultants have warned it must match the Grand Bahama Port Authority (GBPA) for service delivery if it realises its objective of regaining regulatory control in Freeport.

The newly-disclosed McKinsey report reveals that one of the Christie administration’s three key goals in the talks over Freeport’s future is to “harmonise Grand Bahama’s regulatory framework with the rest of the nation”.

To achieve that objective, the international consultants concede that it will have to “regain control of Government-like functions on Grand Bahama and ensure policy coherence” in areas such as energy and cruise ports.

Such targets, while largely anticipated, will likely strike fear into Freeport’s 60,000 residents and 3,500 GBPA licensees, most of whom dread the prospect of the Government (and Nassau) ever exercising regulatory authority over their city.

Seemingly acknowledging these concerns, given the inefficiencies and gaps in public service delivery, McKinsey said the Christie administration would have to “ensure the execution of Government-like functions is equal to or better than the GBPA”.

It added that the Government also needed to engage Freeport’s private sector, and residents, and “clearly communicate the reasons for any changes to address potential stakeholder concerns about transferring these powers to government”.

The GBPA’s regulatory powers have already come into conflict with Nassau’s, especially over the supervision of utilities - communications and now, energy - which is the responsibility of the former in the Port area.

Fred Smith QC, the Callenders & Co attorney and partner, recently suggested that Freeport enact ‘bye laws’ to bring its regulations into line with the Government’s as a way to avoid a wholesale take-over by the latter.

However, Obie Wilchcombe, minister of tourism, in an update to the House of Assembly on the Government’s meetings with Hutchison Whampoa, Freeport’s largest investor, effectively admitted that the administration wants to take back regulatory authority and play a greater role in Freeport’s governance.

McKinsey’s report suggests how the Government might achieve these goals, using Freeport’s investment incentives that expire on February 5, 2016, as leverage in negotiations with the GBPA and Hutchison Whampoa.

It says the Government has three options - full imposition of the expiring taxes on Freeport; extending them in return for gaining land and regulatory functions; or extending them in return for land and development commitments.

Focusing on real property tax and Business Licence fees in particular, McKinsey said the former was the “substantially larger revenue opportunity” for the Government.

It suggested this could generate between $60-$80 million for the Public Treasury, but estimated that these figures would need ‘refining’ once the value of the Grand Bahama Development Company’s (DevCO) landholdings was confirmed.

McKinsey’s estimates have DevCo generating 35 per cent, or $24 million, of Freeport’s total $67 million real properrty tax burden. The next-greatest contributor is BORCO, with $18 million, and then Freeport Harbour Company at $8 million.

As for the $19.8 million projected for total Business Licence fees, McKinsey suggested that the highest payer would be the Freeport Container Port at $4.2 million. It was followed by BORCO, at $3.7 million, and Polymers International with $3.2 million.

Mediterranean Shipping Company’s (MSC) projected Business Licence fee was pegged at $2.5 million, the same as the Grand Bahama Shipyard’s, with the Grand Bahama Power Company’s forecast at $2 million.

McKinsey said the Government would have to let the GBPA retain full regulatory authority in Freeport if it allowed all the tax exemptions to expire. For this to work, the report said DevCo would need to comply with real property tax payments.

If it elected to extend the exemptions in return for regulatory control, the report said the Government needed to determine that Freeport’s governance was critical to Grand Bahama’s revival, and that it would be “better able to lead development” than DevCo.

As for the tax exemptions for land and development commitments exchange, McKinsey said its success again hinged on DevCo “complying with commitments and the Government having effective recourse if they do not”.

When it came to Hutchison Whampoa, McKinsey said the Government could offer ‘tax relief’ for the Container Port and DevCo. In return, it could seek the Grand Lucayan’s sale; a sale or investment in the Grand Bahama International Airport; and an end to the Freeport Harbour Company’s cruise port exclusivity.

For this to succeed, McKinsey said: “Hutchison sees a future in Freeport. Hutchison does not think of any concessions to the Government as a zero sum game/unacceptable”.

The consultants added that it was critical the Hong Kong conglomerate not be “close to a tipping point” in maintaining its Grand Bahama presence, and that it was willing to sell the Grand Lucayan and airport “at less than book value” due to buyers wanting “significantly lower prices”.