The failed gamble: a cautionary tale

  • Unfinished project: residential units at the Caroline Bay complex in Morgan’s Point, Southampton, sit partially completed recently (Photograph by Blaire Simmons)

    Unfinished project: residential units at the Caroline Bay complex in Morgan’s Point, Southampton, sit partially completed recently (Photograph by Blaire Simmons)

  • Big gamble: Bob Richards, the former finance minister, looks on as his successor, David Burt, answers questions at a forum in 2018 (Photograph by Akil Simmons)

    Big gamble: Bob Richards, the former finance minister, looks on as his successor, David Burt, answers questions at a forum in 2018 (Photograph by Akil Simmons)

Leaders in every walk of life must make decisions based on the facts available to them at the time.

Those decisions invariably require judgment and some effort to predict the future. It requires identifying and balancing risks and rewards, determining if decisions align with core principles and how much weight to give to intangibles, such as confidence in the individuals with whom a leader is dealing.

No one pretends this is easy.

And it’s also a fact of life that leaders will not be judged on the facts as they are known at the time of the decision, but on subsequent events.

British Prime Minister Neville Chamberlain was greeted as a hero in 1938 when he returned from Munich and a meeting with Adolf Hitler, having seemingly prevented Britain from going to war.

Two years later he was hounded from office when the war he had failed to prevent broke out and had begun to go badly for Britain. His reputation never recovered.

Former finance minister Bob Richards is no Neville Chamberlain, and the Caroline Bay debacle is hardly comparable to the outbreak of the Second World War, but Mr Richards’s recent defence of the former One Bermuda Alliance government’s decision to issue a guarantee for the project is difficult to understand.

That does not mean that the issue of the guarantee was illogical, but it did involve risk. When the OBA government took power in 2012, the Bermuda economy was in free fall and in desperate need of stimulus.

The Morgan’s Point project had been stuck for some time because investors were fearful of taking on a project on a severely polluted site. The Government had the responsibility for cleaning up the site, and that clean-up was deemed to be unaffordable at $100 million.

So the Government was able then able to negotiate a reduction in the cost of the clean-up in return for providing a guarantee of $165 million to the lenders, the hope and expectation being that the guarantee would never have to be used.

In many ways, this seems reasonable and at first all seemed well. The Government was able to inject activity into the economy and to create jobs.

The developers, who included the widely respected Brian Duperreault, were finally able to start work. The tourism industry could look forward to a new hotel, while purchasers of residential units would also generate economic activity.

This newspaper does not know precisely all that went wrong at Caroline Bay, but the basic facts are clear:

•• The financing the developers were able to raise has been spent

•• It would appear that residential sales, the revenue from which would have gone into further development, have fallen far short of expectations

•• The developers have been unable to raise further financing to finish the project

Unsurprisingly, the original lenders, who are from the United States or local reinsurance companies, wanted to be repaid, so the guarantee was called.

As a result, the Bermuda taxpayer has now been forced to turn over $165 million and possibly more to the resort’s creditors. Because the Bermuda Government does not have $165 million to hand, it has borrowed it, meaning it is borrowing money to take ownership of lent money it may well never recover.

The present government has laid the blame for this at the feet of the OBA, and it is to the Premier David Burt’s credit that he cautioned against this guarantee in 2015.

Finance minister Curtis Dickinson may be on less solid ground when he criticises — the OBA government later gave a smaller guarantee on the St Regis development to help secure lending from Butterfield Bank, where Mr Dickinson was then a senior executive, so he risks being accused of hypocrisy.

Was the OBA government wrong to give the guarantee? Subsequent events say it was.

Mr Richards, although he may have felt the facts before him at the time justified the guarantee, was still betting that it would enable the project to get off the ground, that the project would then move to completion, a new hotel would open and that Bermuda would be better off as a result.

If all had gone according to plan, the guarantee would never have been called.

However Mr Richards’s bet was wrong. For whatever reason — and the public do indeed, have the right to know what went wrong since they are now the owner of the debt — the developers have been unable to complete the project, which is now stalled with little to show for it beyond a church, a marina, some unfinished buildings and a rather grand entrance that sliced a sizeable piece of arable land in two.

If the bet turned out badly, was it still worth it? Certainly, it generated some jobs and economic activity. But what’s left is an unfinished project and the Government is now having to pay contractors who were left unpaid.

It’s not impossible that Caroline Bay will find financing and get going again. But, at the moment, the prospects are bleak.

Mr Richards and the OBA put the need to get the economy moving ahead of first principles, namely that governments should be extremely wary of guaranteeing or financing private developments and, as Mr Burt said in 2015, the Government should not be in the business of building hotels.

Indeed, the history is not good — with the OBA government’s support, the Corporation of Hamilton backed the development of the Par-la-Ville hotel and barely avoided financial disaster there.

Mr Richards also argued that the arrangement had benefited Bermuda at the time. The clean-up was supposed to cost $100 million, which the Government could not afford. Instead, the clean-up cost the taxpayer $35 million, with the guarantee being given instead.

Had the Government proceeded with the full clean-up and the hotel development had then proceeded without a guarantee — although there was some question about that — the cost to the taxpayer would have been $100 million or perhaps more.

Instead, the cost has been much higher: the $35 million spent on the clean-up and now at least $170 million in guarantee money.

So this decision ended up costing Bermuda $100 million more than it would have if the original plan had been followed and a developer had proceeded without a guarantee.

Mr Richards and the former OBA government cannot be faulted for their good intentions or for their desire to get Bermuda’s economy going.

But unless a wholly unforeseen event interferes, and this was not the case with Caroline Bay where the risks were fairly obvious, then leaders must be judged on their results.

With Caroline Bay, the guarantee was a gamble that went wrong and, at the very least, Mr Richards should accept some responsibility and future leaders should heed this as a cautionary tale of how good intentions can turn bad.

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Published Oct 4, 2019 at 8:00 am (Updated Oct 3, 2019 at 11:50 pm)

The failed gamble: a cautionary tale

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