The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Grand Bahama Development Company (DevCO) closed just 14 sales worth more than $250,000 over a 15-year period, leading to recommendations it be ‘incentivised’ via the imposition of real property taxes.

McKinsey, the international management consultancy firm, in its report on the Government’s economic development options for Freeport, suggested that the absence of any ‘carrying costs’ for its 70,000-acre real estate holdings was encouraging DevCo to merely accumulate land.

“DevCo’s property tax liability could spur land sales by radically altering the costs/benefits of passively holding land,” McKinsey suggested to the Christie administration in its November 2014 report.

“DevCo’s costs to acquire and hold 70,000 acres are low. Low costs encourage DevCo to keep prices high and hold out for major profit. No property tax creates minimal carrying cost.”

Pointing out the consequences, McKinsey added: “Land sales have languished. DevCo has closed only 14 sales over $250,000 in the last 15 years.

“The last major tourism development sale was 30 acres to Marriott in 2006. The site has remained undeveloped.”

McKinsey estimated that the Government could earn between $10-$26 million per year in real property tax payments from DevCo were it to impose the tax in Freeport, adding that the expiry of this incentive “could create an imperative for development”.

McKinsey said its data was based on property title search records, with the 2006 sale from Freeport Commercial and Industrial to Marriott Ownership Resorts worth $9.9 million.

The McKinsey report, which was finally filed with the Supreme Court yesterday in response to the Judicial Review challenge to the consultation process over the Hawksbill Creek Agreement’s review (see other article on Page 1B), remains as relevant now as it did 14 months ago.

This is because several key Freeport investment incentives, including its real property tax and Business Licence exemptions, are due to expire in less than three weeks’ on February 5, 2016.

McKinsey’s report argues that the failure to align tax policy and related incentives with investment opportunities has been a major factor retarding Freeport’s growth.

It cited DevCo’s seeming minimal activity, and the absence of real property taxes, as one example, adding that this had “limited incentives to maximise productive use of the land”.

Real estate development is one of the key Bahamian economic drivers, given its links to the hotel, real estate, construction and legal industries, and McKinsey said there had been precious little of it in Freeport in recent years.

DevCO is 50/50 owned by Hutchison Whampoa and Port Group Ltd, the Grand Bahama Port Authority (GBPA) affiliate, and several observers have argued previously that the imposition of real property tax in Freeport might force the company to become proactive in its sales and development activities.

McKinsey’s recommendations, which echo these thoughts, are contained in a section that sets out potential negotiating strategies that the Government could employ with Hutchison Whampoa in relation to Freeport’s expiring investment incentives.

The Hong Kong-based conglomerate has invested more than $1 billion in Freeport, but it is unclear whether the Christie administration followed any of McKinsey’s advice during their December 2015 meeting with Hutchison Whampoa in London.

“The addition of property tax will make it difficult for DevCo to remain a passive owner,” the report said.

“Estimates suggest a range of $10-$26 million a year in long-term tax liability.

“The lack of data from DevCo creates significant tax uncertainty, but even at the low end, it would likely prompt a major change in the firm’s approach.

“Given its low sales, DevCo may need to dramatically reduce prices and/or transfer a portion of land back to the Government.”

This appears to suggest an end to Freeport’s real property tax exemption might have an effect tantamount to a partial ‘nationalisation’ of DevCo’s land holdings, although the Government would likely pay for any land it takes.

For the real property tax strategy to bear fruit, McKinsey said the Government and DevCo needed to “develop a holistic strategy for land use and identify target markets”.

Warning that this might involve re-zoning for land use, it added that the Government - with or without DevCo - then needed to create a full inventory of available land, then determine the sales process and marketing plan to be employed.

“If DevCo retains ownership, government will have minimal control over divestment, and buyers may not fit with the overall development strategy,” McKinsey warned.

“DevCo may not respond to tax, and opt to subsidise operating losses (as Hutchison does with the Grand Lucayan).”

Should the Government get involved, McKinsey said it would incur extra costs from sales and marketing, plus maintenance and GBPA service charges. Compliance, too, would be key.