Explaining bonds

November 27, 2002

Dear Sir,

I have been asked on a number of occasions recently to explain exactly what a performance bond is, and I was hoping you might share this letter with your readers to bring some light on the subject.

Probably the most common misconception is that a performance bond is a type of insurance. It is much more than that. It is a guarantee. It is a guarantee made by the surety company (which is frequently also an insurance company), that the contractor will perform his or her duties under the contract, normally with specific reference to time and value. Should the contractor fail to perform his or her obligations (i.e. fall into liquidation, incur unacceptable delays, build to unacceptable construction standards, etc..), the owner can call on the surety company to perform the remaining obligations under the contract, all at the sole expense and direction of the surety company.

These obligations should not be underestimated. The surety will be required to immediately act to rectify the situation with cash in hand. Experienced surety companies generally require the contractor to secure liquid assets well exceeding the value of the bond, in order to provide adequate protection against a claim. Surety companies are not in the construction business and they do not want to be. The paradox of a performance bond is that, if you can secure one you probably do not need one, and if you need one you most likely will not be able to secure one.

While performance bonds (and other types of bonds) are common in the United States and other large countries particularly in publicly funded projects, they have not been so prevalent Bermuda. The relative size of projects has generally been sufficiently small and a contractor's reputation carries as much weight as his bank account in our tiny Island community. However, when projects approach the hundred million dollar mark, protection of public funds is definitely prudent.

The performance bond requirement on the Berkley Project Tender was sensible and undoubtedly the result of learning from past mistakes. I read with interest the Auditor General's comments on the performance bond requirements and the surety company in your recent publication. I am not privy to the financial details of the surety company, nor the exact nature of the guarantee made within the performance bond. However, I do share some of the AG's concerns. If anybody should be aware of the financial stability of a bonding agency, it is the Government. In the United States, surety companies are required to register with the federal government sufficient liquid assets (cash, CD's, stocks, bonds, etc) to cover the full value of all bonds issued. Other assets such as property and businesses cannot be converted into cash quickly enough to provide a stalling construction project the necessary cash to bring it to a timely completion.

In the unlikely event that the Government does call on the surety to perform obligations under the bond agreement, Union Asset Holdings Ltd. would have to sell all of its assets to provide the necessary cash for the project. I say this is an unlikely event because a labour Government would not call on the major labour union to relinquish all of its assets, effectively crippling it and at the same time shooting itself in the foot. Such is the incestuous nature of doing business in Bermuda. It could just as easily have been another government and another MP on the board of another insurance company.

I also find it equally unlikely that a contractor would be able to swallow the additional fixed costs that a year of delay will incur. (Not to mention the borrowing costs on cash advances at 9 percent!) Some costs on construction projects are a function of time (i.e. staff salary, equipment charges, electricity bills, etc.) and on a project of this size, may approach or even exceed one hundred thousand dollars a month. So if the project is delayed such significant durations as has been quoted recently, Government will more than likely be left in the unenviable position in a year's time to have to justify bailing out a failing contractor in order to get the project completed. They will have precedence to refer to and will feel justified in their actions. Unfortunately, they will not have learned from previous mistakes.

I would love to be proven wrong on a number of these comments, so I would ask that you keep this letter on file for republication in mid to late 2004/early 2005.

ALEX M. DECOUTO

Quantity Surveyor

P.s. The opinions expressed above are my own and not those of any organisation or group which I might be associated with.

Webb teaching hatred

November 19, 2002

Dear Sir,

I am writing in response to Minister for Tourism and Telecommunications Renee Webb's comments in the article entitled 'Racism Alive and Well: Webb' of November 16, 2002.

It amazes me that in this day and age we can still have leaders of our Country inciting racism and making prejudicial comments as set out in the above mentioned articles.

How can anyone stereotype a person because of their family name? How would Minister Webb respond if she was judged based on previous actions of her forefathers and referred to (and thought of) as "a Webb" rather than as an individual with independent views and ideas and a unique personality? (Not to mention a name and title.)

I have always been brought up to think of people as individuals and, without stereotype or prejudices, have judged them instead for who they are individuals.

What is Minister Webb teaching our people? That we should look at an individual's forefathers' reputations in order to judge that individual? Isn't that exactly how to keep racism and prejudices "alive and well"?

Out of interest, I ask Minister Webb what proof there is that the Bermuda Tech was taken away "because it was producing too many male black leaders"? This is an incredibly harsh statement/accusation and sounds like the kind of statement a person with a lot of hatred can only say only to instil more hatred.

As regards reverse racism, I believe that our people are talented enough, ambitious enough and with enough self respect that they would not be proud to receive an award or selection based on the colour of skin? Promoting such a concept will only serve as an injustice to the people of Bermuda and serve as a huge step in the wrong direction. It's basic economics: healthy competition, quality and efficiency are destroyed resulting in the society, as a whole, suffering the consequences.

I've always promoted Bermuda based on my belief that we are ten years ahead of anywhere else that I know in the world in terms of race relations, education, equal rights for men and women and economic success. I am constantly impressed by the number of well educated/travelled black and white Bermudians. Where else in the world has there been a Country run by black female heads of the Government and Opposition political parties?

It is so disheartening to look at the paper and read, from an educated person forming part of ouir governing party, these comments of prejudice and race. How can anyone justify teaching these views?

I sincerely hope that in the future Minister Webb will look at (and refer to) Dr. Grant Gibbons as Dr. Grant Gibbons rather than as "a Gibbons" and do the same for anyone else Minister Webb finds fit to belittle.

With respect to promoting Bermudian business, I hope that Minister Webb remembers that Bermudians have a lot of pride and are advanced enough in our economy and views to respect healthy competitiion. Above all we all seek to promote healthy competition rather than destroy it (which seems to be Minister Web's mandate).

Finally, I would like to address the comment of "in touch with the people". I would say, yes, Dr. Gibbons is in touch with the people, as my generation (the generation following Minister Webb's) is past prejudices, generalisations of the concept of promoting people on the basis of colour of skin. I believe Dr. Gibbons understands that.

MINISTER WEBB'S "KODAK MOMENT"

London, England