Gencom’s risky business
Curtis Dickinson, the Minister of Finance, has received generally high marks for his handling of the economic and financial fallout from the coronavirus pandemic.
He has, rightly but with a suitable show of reluctance and many expressions of regret, borrowed large sums to enable Bermuda to survive the damage of the Covid-19 lockdown.
He has – while doing a job that no one else would surely want right now – combined financial knowhow with compassion. Not all of his predecessors would have done the same, and that is to his credit.
That combination of compassion and creditworthiness has come into question for the first time as a result of the decision to pay the almost 700 Fairmont Southampton employees’ money equivalent to the redundancy payments they should have received from the hotel when it closed in October.
No one begrudges the Government’s desire to look after the employees, but genuine questions about whether the public’s money can be recovered are being asked.
When the hotel failed to pay the $11 million in redundancies, Mr Dickinson said he – and he alone – took the decision to lend the money to the employees.
The assumption at the time, and this was confirmed at least once to The Royal Gazette by a government spokesman, was that Gencom, the owner of the hotel, would repay the Government the $11 million as soon as it could.
But last Friday in the House of Assembly, Mr Dickinson dropped a bombshell.
There was no agreement with Gencom, he told MPs. Requests for information from Gencom had been met with silence for a week or more.
Mr Dickinson was circumspect in the House of Assembly on the question of how the Government intended to recover the money, but at a press conference on Monday he was more forthcoming.
Having taken legal advice in London and Bermuda, Mr Dickinson said the Government had lent the money to the workers on the basis that they agreed to take part in a lawsuit against Gencom subsidiary Westend Properties, which actually owns the property, seeking the recovery of the funds.
A class-action lawsuit means there will be only one legal action against Westend, not as many as 700, and by forcing employees to agree to join the action, the Government could be sure of getting its money back when the employees would otherwise have little motivation to undertake such an action on their own.
So Mr Dickinson seemed to have devised an approach that would give the Government some means of getting its money back. It could not sue Westend Properties directly because it had no agreement with the company.
A belated press release from Gencom stated that the company had tried and failed to negotiate a loan agreement with Government, which had instead made the loans directly to the employees. Mr Dickinson will now need to explain why he chose that route.
Despite Gencom’s protestations last night, it seems clear that Westend does not have the money for the redundancies or the renovations, although it seems confident it can raise the funds when the economy settles down.
On the face of it, the merits of the lawsuit are clear. The law is clear on redundancies. Based on the documents The Royal Gazette has seen, the hotel does not dispute this and has co-operated in providing the amounts owed to each employee.
The real issue is that if Westend says it is unable to pay, the plaintiffs, directed by the Government, have few options for recovery of the funds. The most dramatic is to put Westend into liquidation, meaning the company could be forced to sell assets – the hotel property – to satisfy its creditors. It could also sell off smaller parts of the property before a liquidation.
Mr Dickinson has emphasised the Government’s first priority is to protect the rights of Bermudians, and this is inarguable. Having 700 people lose employment with no financial safety net in the existing economic climate would be inhuman and disastrous in economic terms.
However, it still sets a precedent for other businesses to see this as a way of not paying redundancies in the future. If the Government is going to step in and loan redundancy payments to workers, a struggling business may stagger on until it has completely run out of money, knowing the Government will come to the rescue of the staff. Then, when the Government sues to recover the loans, there will be no money or assets left.
It would have been better for all if the hypothetical company had seen the writing on the wall and closed while it still had enough money to meet its obligations to its employers. But by removing the moral hazard, the company may try to carry on in the slim hope of a turnaround, while employees will look to the example of the Fairmont Southampton for reassurance that they will not be left destitute.
This is a dangerous precedent to set.
There is another risk. The Bermuda Government, in taking this action, may deter other potential developers from investing in Bermuda, especially given the unprecedented economic circumstances that have damaged all parts of the tourism industry, including hotel owners.
An industry insider The Royal Gazette spoke to thinks this is unlikely to harm Bermuda’s reputation, but it could create another reason for developers not to invest in the country at a time when investment is needed more than ever.
Although Mr Dickinson has been at the centre of the controversy, Gencom itself has behaved badly. Having come to Bermuda with the purchase of Rosewood Tucker’s Point and turned that property around after it entered receivership, there was optimism that it would be a good partner for Bermuda with its largest resort.
But it has been deafening in its silence until last night. Gencom is a large company that has completed more than $6 billion in assets and owns 17 hotel properties around the world, according to its website.
While it may be good business practice to ring-fence its various properties, it defies logic that it cannot find $11 million to meet its contractual obligations to its own employees, even in the present circumstances.
Its belated response last night does not answer the question of when it plans to meet its obligations to its employees. Promising to do so is not sufficient. It must do better and quickly.