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A bit rich, this buyer’s remorse

David Burt recently noted that paying out almost $6 million to Skyport as part of the airport agreement was a hard pill to swallow in the middle of the Covid-19 crisis, and he was right.

It has been argued by the Premier and by Neville Tyrrell, the transport minister, that this money could be used for better purposes, or indeed not spent at all, at a time when spending is soaring with no end in sight.

To some degree, this payment, as unsavoury as it is, is seen as vindicating the Progressive Labour Party, which opposed the airport deal when in Opposition, going so far as to support the blockading of the House of Assembly and preventing the duly elected representatives of the people of Bermuda from approving the airport deal in Parliament.

Is the PLP vindicated? Could Bermuda have avoided paying $5.77?million if it had negotiated a better agreement, taken a different approach to airport construction or chosen not to build it at all? It's worth examining this in detail because it sheds light on the Government's approach to financing public projects.

The crux of the Government's criticism is that the airport agreement contained a revenue guarantee that the airport operator had to be paid if passenger numbers fell behind a certain level. The purpose of the guarantee was to enable the airport to cover operational costs and to meet its debt obligations. It would have been vastly more difficult for the airport builder to borrow the money to build the airport without the guarantee.

The existing government's criticism of this deal centres on two problems with the agreement: the first was that it did not contain the ability to vary it, as would usually be the case in most leases or agreements, where unforeseen events may make it difficult for one of the parties to meet their commitments and where mutually agreed changes become necessary.

Bob Richards, the Minister of Finance at the time of the agreement, has not explained why the ability to adjust the agreement was excluded, but leaving aside the unlikely possibility that it was human error, one possibility seems likely.

This possibility is the very determination of the PLP to oppose the agreement and its promise to tear it up if and when it came into government. This is a common risk in any democracy, but it is understandable that the builders of the airport would have sought some protection against it, so they would not find themselves leaving a half-built airport with a mountain of debt and no means of paying it should the government change hands.

This is an important principle of democracy — few outside parties would be willing to engage in agreements with the Bermuda Government if a change of government, or simply leadership, rendered those agreements null and void. In fact, the PLP's previous tenure in power, and in particular the longstanding efforts to void the contract for the Bermuda Cement Company, has already harmed the island's reputation in this respect and would have given the airport operator pause.

So the inability to vary the agreement is to some degree understandable, even if it is akin to using a sledgehammer to crack a nut.

The Government's second criticism concerns the revenue guarantee and the absence of a provision for acts of God, such as hurricanes or Covid-19, which are more out of the parties' control than, for example, failures to market Bermuda tourism and international business successfully or to negotiate new flights.

On the face of it, this is a reasonable criticism, although the airport could make the same argument if it was unable to meet its debt obligations as a result of acts of God, and if it then defaulted on its obligations, this would be an act of remarkable negligence on the Government's part.

The obvious solution is that either the airport or, in the circumstances, the Government should have secured some of form of insurance to mitigate the risk. As it happens, Lawrence Scott, the MP and chairman of the Bermuda Airport Authority, revealed that this was sought. Interestingly it was not sought for a pandemic on the basis that it could not be foreseen, which undermines the argument that an acts of God clause in the original agreement would have covered the loss of revenue for a pandemic. The likelihood of getting an acts of God exclusion that covered any possibility seems remote.

More importantly, business interruption insurance was considered to be too expensive by the authority, which re-emphasises the truism that insurance is always too expensive until you need it. What is worrying now is that the Government is exposed for further revenue losses in the event of a major hurricane or other natural catastrophe that eliminates air travel for a significant period.

But it is relevant that no insurance coverage was even considered for a pandemic.

Without getting into a debate over whether an airport should have been built at all, or whether Bermuda could have raised the debt for an airport without a public-private partnership, it is worth considering what losses the Government would have sustained in the event it was the sole developer of the airport or chose not to build a new terminal at all and found itself without revenue during this period while paying the employees of the airport.

Finding this number is relatively difficult, but the studies carried out before the airport project going ahead put airport revenues at $31 million a year, or an average of $2.5 million a month. Thus when the airport was effectively closed from March through June, the period for which $5.77 million was paid to Skyport, the loss of revenue would have been as much as $7.5 million, although probably closer to $6 million. In other words, the Government might have lost as much in this period as it would have done had it retained control of the airport.

As it turned out, it has not had to pay the staff at the airport or the other running costs. So it is difficult to see what the Government is complaining about, assuming it does not operate its finances on a “have your cake and eat it too” basis — counting only lost revenues and not considering unpaid expenses.

This is not to say the Government was not right to highlight this alleged flaw. But having already identified the flaw in the agreement, it has had three years to take mitigating action and failed to do so.

In the meantime, Bermuda has had several years of economic activity and jobs, without which the economy would be in an even worse state.

Perhaps, it should be grateful for small mercies.

The 30-year war: the new airport terminal may be ready soon, but the politicking will go on for some time (Photograph supplied)

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Published August 11, 2020 at 9:00 am (Updated August 11, 2020 at 9:01 am)

A bit rich, this buyer’s remorse

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