The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government has defied Hutchison Whampoa in deciding to impose real property tax in Freeport, a $50-$60 million revenue-raising move that represents a direct strike at the city’s largest investor.

The Hong Kong conglomerate, and the Grand Bahama Port Authority’s (GBPA) owners, will be the ‘greatest losers’ from the reform announced on Monday by Prime Minister Perry Christie, whereby real property tax is to be levied on foreign-owned, undeveloped land greater than five acres.

This will especially hit the Grand Bahama Development Company (DEVCO), in which the two parties are 50/50 joint venture partners, as it is Freeport’s largest landowner with a “land holding inventory” of some 74,000 acres.

The Government’s move also represents something of a ‘double whammy’ for the GBPA owners, the Hayward and St George families, given that they also own 100 per cent of Freeport’s other landholding company, Freeport Commercial & Industrial.

The Christie administration, and its Hawksbill Creek Agreement Review Committee and external consultants, all believe the imposition of real property tax will incentivise major foreign developers and landowners to become more proactive in developing their holdings.

The Prime Minister on Monday said the absence of such ‘carrying costs’ had been “an important inhibitor to development on Grand Bahama”, as it had enabled investors to sit and ‘land bank’ without any penalty.

The unanimity on this issue between the Government and its advisers contrasts with the warning supplied last June to the Review Committee by Hutchison Whampoa, which warned that even the “threat” of real property tax imposition would not spur the Hong Kong-based conglomerate to invest further in Freeport and Grand Bahama.

Graham Torode, DEVCO’s senior executive and a Hutchison Lucaya director, told the Committee on June 11: “Hutchison’s huge losses in the Bahamas, the unattractive union environment, the high cost of air travel, the lack of local skills, the threat of property tax and the growing threat from countries such as Cuba and Cayman etc combine to make the Bahamas a challenging investment environment.

“Despite the obvious challenges, Hutchison Properties (now part of Cheung Kong Property Holdings) may consider investment in the second home market, but only if good commercial returns can be anticipated and if government can create a stable economic environment which is competitive with other regional locations.

“In this regard, the threat of property tax has simply reinforced a negative view of the Bahamas. It has not created an incentive for Hutchison to invest.”

Mr Torode returned to this theme later in his reply to the Committee, reiterating that “the certainty property tax will not be introduced” was one of the keys to further Hutchison/CK Property Holdings investments in the Bahamas.

He added: “In summary, the Bahamas is fighting for inward investment in a crowded and fiercely competitive world. International property companies can invest wherever they choose.

“Issues such as labour mobility, and availability, sensible economic citizenship programmes, a well-educated workforce, taxation and the general ease of doing business are all key.”

While it may same strange to defy an investor that has injected $1 billion and counting into Freeport’s economy, Tribune Business was told that there was ‘method to the Government’s apparent madness’.

One Freeport-based source, speaking on condition of anonymity, told Tribune Business that many residents and businesses did not appreciate the significance of real property tax’s implementation for the city’s long-term future.

“People aren’t excited because they see the delays,” the source said of the Memorandum of Understanding (MoU) signed between the Government and the GBPA. “They see nothing changing.

“They see a lot of talk, but they’re missing the point on real property tax.”

The source said the tax’s impact on DEVCO and Freeport Commercial and Industrial represented a ‘squeeze play’ designed to force the Haywards and St Georges to sell by squeezing a key income source.

They suggested that Hutchison/CK Property Holdings had lost significant leverage by seeking to sell the Grand Lucayan, and would either seek to also sell their equity interest in DEVCO or become proactive in developing their holdings.

The source also added that Hutchison Whampoa was only likely interested in the Freeport Container Port, and was in danger of being replaced as Freeport’s largest investor by Mediterranean Shipping Company (MSC).

MSC was a likely contender to acquire the Grand Lucayan if it moved on plans to use Freeport as a cruise ‘home port’, the source said, and its interest could also extend to other GBPA/Hutchison assets, namely Freeport Harbour Company and Grand Bahama International Airport.

“He [the Prime Minister] hit all the buttons,” the source said. “Nothing was left out. The taxation and taking over the regulatory structure is going to set the stage for the squeeze. The Government has done a hell of a job in my opinion.”

The real property tax issue especially exercised James Smith, former minister of state for finance and ex-Central Bank governor, who expressed “reservations” to fellow Hawksbill Creek Agreement Review Committee members about its extension.

“It is my view that one of the impediments to economic development in Grand Bahama, and indeed in the rest of the Bahamas, is the substantial amount of undeveloped acreage held by both individuals and corporations; particularly non-Bahamians,” Mr Smith wrote on June 10 last year.

“The absence of an effective tax on undeveloped land translates to little or no carrying charge on the property, and therefore could be held speculatively for indefinite periods of time while at the same time denying access to any other potential developer.

“This might be particularly true on Grand Bahama, where large parcels of land are held by a small minority of companies.”

Both the Committee’s report, and the economic impact analysis conducted by Oxford Economics, suggested that the imposition of real property tax on undeveloped land in the Port area could raise between $50-$60 million in annual revenues for the Government.

“Prior analysis provided to the Committee by the Ministry of Finance suggest that the value of the tax concessions to entities operating in the Port area is more than $50 million per annum,” the Committee’s report to the Government said.

“Representatives for DEVCO suggested a different, and much lower, estimate of their property tax liability than the Ministry of Finance, highlighting the need for a transparent assessment process.”

Mr Christie told the House of Assembly on Monday that Oxford Economics’ work had backed the Committee’s real property tax thinking, and said of the consultants’ other key conclusion: “The GBPA model of quasi-governmental and regulatory powers does not exist in the US, and is a very dated model in today’s world.